It’s Time For The ECB To Get Off The Fence

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It's Time For The ECB To Get Off The Fence
It's Time For The ECB To Get Off The Fence

It's Time For The ECB To Get Off The Fence

Next week’s meeting of the European Central Bank will be one of the most closely watched meeting of any developed economy’s Monetary Authority so far this year. The ECB’s Governing Council will have much to discuss. They can no longer hide behind the excuse of ‘waiting for higher quality economic data’. Nor can they any longer avoid the unevenness of the recovery across member nations.

There is ample evidence of economic activity and growth in the Eurozone as a whole. The Euro continues to post gains against both the British Pound and the US Dollar. This is interesting because both the US Federal Reserve and the Bank of England have strongly signaled that monetary tightening is inevitable in their respective economies. The timing of which remains the sole question.

The European Central Bank on the other hand is being tipped to further cut it’s benchmark interest rate, if not at next week’s meeting then with near certainty at the subsequent one.

The Eurozone is facing a unique set of challenges. Serious concern is growing around the rate of inflation, or rather lack of it. The most recent figure for January showed inflation in the economic bloc running at 0.8% annualized. This is the second month in a row that this rate stubbornly refuses to move higher, and remains a long way below the ECB’s stated target inflation level of 2%. There is a mounting prospect of deflation taking hold, an undesirable situation that is much easier to avoid than from which to recover.

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Deflation is not the only challenge facing the ECB at the moment. Sure, growth is present, and in the current environment a posting of 0.3% for the last quarter could be considered impressive. The problem is that the growth rate is not evenly distributed across the single economic area. Member states face different base employment circumstances, are burdened with different debt/GDP ratios and in response implement very different fiscal and social policies. Consequently, certain Eurozone countries are recovering from the economic crises at a faster pace than others.

The ECB however is hampered by the fact that in a bloc wide monetary system it can only work with a ‘one size fits all’ policy instrument. How it chooses to use this will become clearer next week. So far it appears that the needs of the slower to recover member states coupled with persistently low inflation will win out and monetary easing will result.

To contact the reporter of this story: James Brennan at james@forexminute.com